DDN Business Insider | Janet Yellen's China Visit: 'Navigating the fine line', promoting competition while maintaining cordial relations

Editor's note: U.S. Secretary of the Treasury, Janet Yellen, ended her visit to China last week. During this visit, Yellen unusually expressed thawing signals on the bilateral ties between China and the US. What does this mean? Regarding this topic, we have invited Hu Dinghe, a visiting scholar at Harvard University, and Liu Ying, a Researcher from the Chongyang Institute for Financial Studies at the Renmin University of China, to bring their comments and analysis. Following is the transcript of the interview.

【Anchor】Hello. First of all, Mr. Hu, during Yellen's visit to China, met with several officials in the Chinese financial sector. Clearly, she expressed that the U.S. did not seek to decouple from China, releasing many positive signals. However, before her visit, she had exerted pressure on China's three major industries: electric vehicles, lithium-ion batteries, and photovoltaics. What does this contrast in attitudes mean?

【Hu】On one hand, this shows that there are differences between China and the U.S., but there is also cooperation. The differences and cooperation coexist. After the establishment of diplomatic relations between China and the U.S., and especially after China joined the WTO, the close and even inseparable economic ties between the two countries have made it hard for one to be decoupled from the other.

On the other hand, both sides must strengthen mutual communication to understand each other's position and bottom line to avoid misjudgment, conflict escalation, and global impact. This is also a delicate balance. One side can be more assertive; for example, China seemed more forceful this time. During Yellen's visit, China also invited Russian Foreign Minister Sergey Lavrov to visit China, giving him a relatively high reception level. From this point of view, China is more determined, and perhaps the U.S. made some compromises and concessions. This showed that Yellen was more pragmatic, flexible, and open-minded.

【Anchor】Alright, Ms. Liu, what do you think?

【Liu】I think this contrast in attitude represents that the so-called "excess capacity" is neither reasonable nor appropriate. Even though Yellen is an expert-type official, she is also a politician. From a technocrat's point of view, she must be opposed to the decoupling of the U.S. and China and should also be opposed to the so-called "excess capacity" in principle. She repeatedly emphasized that it would be disastrous if the U.S. and China decouple, and she expressed many positive signals during this visit. Her two visits to China within a year also symbolize the critical economic and trade relations between China and the U.S. through action. So naturally, when Yellen met with the Chinese financial sector officials, she emphasized that the U.S. will not decouple with China, and will even seek to strengthen the balanced growth of the U.S. -China and the global economy, as well as develop cooperation regarding all aspects of global issues. Her speech last year on China-US economic and trade relations emphasized three points. One of which was to seek healthy economic cooperation with China.

However, she is also a politician. When she faced her U.S. enterprises, who could not compete with Chinese enterprises on EVs, lithium-ion, and photovoltaics, and who asked Yellen to speak for them, as the U.S. treasury secretary, she must show support for U.S. enterprises. This is understandable. Also, in her speech about China-US economics and trade last year, her first point was that the U.S. would safeguard its national security and its allies.

【Anchor】Alright. Mr. Hu, do you think that after Yellen clarified that China and the U.S. will not decouple her argument of "excess capacity" against China's "New Three Pillars" be loosened up?

【Hu】Of course, we have hopes that relevant policies will be relaxed, but we should also note that the U.S. presidential election is coming up soon. Historically, the U.S. presidential elections tend to lead to more stringent and stricter policies toward China. Therefore, although we may hope policies can be relaxed, we can not hold too many fantasies.

【Anchor】Alright. Ms. Liu, do you think there can be a change in the U.S. attitude and policy towards China's "New Three Pillars"?

【Liu】I don't think (the policies) will loosen up. The so-called excess capacity of the "New Three Pillars" that Yellen puts forward is essentially baseless, a fabricated accusation and simply fault-finding. She made this argument to defend or protect U.S. enterprises that do not have competitiveness (against Chinese enterprises) in the areas of the "New Three Pillars". During her visit, China also explained that we would not voluntarily cut off our own limbs. After Yellen goes back to the U.S. and finishes the corresponding report, the results will not change much, and the U.S. enterprise will not become more competitive because of her visit to China. So I think the U.S. government will probably continue to make trouble and will use so-called trade protectionism. Together with the European Union, they will continue to target China to take a variety of investigations and impose tariffs. That is a kind of suppression over China and the "New Three Pillars". This is one of the manifestations of the so-called trade friction and science and technology friction in recent years.

【Anchor】Alright. The data shows that China's new energy vehicle (NEV) takes up 62% of the world's NEV market share. Mr. Hu, what does this data reflect about the competitiveness of China's NEV industry in the global market?

【Hu】China has established a complete and efficient whole-industry supply chain.

Of course, China's NEVs have a relatively large international competitiveness, as we have a large production volume and better value over price. But there is still a big gap between us and the leading companies such as Tesla. For example, there are significant gaps between our R&D and innovation. Tesla remains difficult for us to catch up in fully autonomous driving and other future directions. Tesla's innovation is more revolutionary in defining and inspiring future industries. And we are more focused on learning, following the trend, and imitating. We still need a long time to catch up. So we should realize the gap here.

【Anchor】Alright. Ms. Liu, what do you think about the competitiveness of China's NEV industry in the global market?

【Liu】The development of China's NEV market has shown the flourishing of numerous companies. China has become the largest exporter of NEV in 2023. Our NEVs are in such high demand in some countries that they are challenging to obtain. The automobile is the crown of industrial production. China has a complete supply chain and industrial chain in NEV and in the field of traditional automobiles. Regarding Intelligent Connected Vehicles (ICV), our research found that some automobile companies have achieved 100% intelligence in key production processes. This includes high levels of digitization, which is also in a leading position globally. The NEV represents strategic emerging industries, including the ICV, and their industrial and supply chain development. NEVs are an essential direction for us to develop. They also represent China's New Quality Productive Forces and drivers for emerging industries. We can not easily give up on them!

【Anchor】In the face of the changing international trade environment, Mr Hu, how do you think China's EV enterprises should respond and maintain export growth?

【Hu】If China's EV industry wants to maintain its export growth, I think we need to innovate. However, this does not mean innovating without reasons and foundations; rather, it means adapting to the market demand.

How to connect with the global market is the most critical element to maintain our competitiveness. At the same time, I think raising workers' wages and giving them better welfare benefits is also necessary. Doing so will facilitate the expansion of consumption, which is also essential for us to maintain export growth.

【Anchor】Yes. And what do you think, Ms. Liu?

【Liu】First of all, we can not give up or weaken the strategic development, development orientation, direction and drive of NEV because Yellen said that China's NEVs are overcapacity. I think we can take the "Three More" way to maintain the export momentum of EVs. First, we could consider diversifying export destinations further. Our NEV exports do not necessarily have to focus on the U.S. or Europe. We have high quality and low prices. Since they (U.S. & Europe) want to raise tariffs and non-tariff barriers to us, we can instead, export the products to more than 150 countries that are part of the "Belt and Road Initiative".

Secondly, I think it is possible to consider more varieties of export products. That is, to produce and provide a variety of products, targeting different countries and different needs. So NEV companies need to develop different NEV products based on the demand in different countries and regions, emphasizing the design of ICVs, driving comfortability, intelligence, and automation level. Thirdly, I think it is" more" intensity in export. There's still a long way to go if we want to develop from a large automotive country to a strong automotive country. The export of NEV is a necessary way to build a strong automotive country. A strong automotive country can satisfy not only the demand for NEV from one single country but also the demand from the world. This is also in line with the positioning of China as a major manufacturing country and a major economy in the world. In response to the U.S. and Europe's suppression of our NEV exports, we need to take strong measures, including but not confined to, legal actions and other necessary, reasonable, and forceful actions. The NEV export also requires us to strengthen the NEV production chain system, and also use the integrated advantages from our financial institutions and logistics enterprises to consolidate China's NEV competitiveness in the world.

【Anchor】Alright. On the afternoon of April 8th, Deputy Minister of Finance Liao Min responded during a media Q&A session regarding Yellen's visit to China that an important consensus had been reached in the economic and financial fields. Taking various factors into account, Mr Hu, how would you evaluate the subsequent impact and actual effect of the consensus?

【Hu】This time both sides reaffirmed the three points of consensus reached at the San Francisco summit in November last year, which are strengthening communication, preventing decoupling, and jointly addressing challenges. They also reached a new consensus: firstly, co-led by the U.S. Treasury and China's Ministry of Finance under the framework of the China-US Economic Working Group, the U.S. and China to exchange views on balanced growth in the domestic and global economies. Secondly, the People's Bank of China and the U.S. Treasury to lead under the framework of the Financial Working Group and continue to exchange views on financial stability, sustainable finance and anti-money laundering. This consensus, in my view, shows that, first, both sides recognize the necessity of communication, and both sides are willing to engage in more discussion and cooperation. However, whether there will be empty talk or genuine progress depends on if there are concrete actions from both sides. I think both sides may make some concessions, but it is not easy to make any fundamental and substantive concessions.

【Anchor】Alright. Ms. Liu, what do you think about the subsequent impact of Yellen's visit to China?

【Liu】 I think Yellen's visit, in essence, aims to turn the Vision agreed upon by the leaders of the two countries on the San Francisco Sumit into reality. Under this backdrop, her visit is to implement the consensus reached by the two leaders. The purpose of her visit clearly is to promote cooperation in financial, economic and other areas between China and the U.S.. As we are all aware, in the San Francisco Summit last year, the two Presidents reached more than 20 agreements in areas like economics, finance and AI. The Economic and Financial Working Groups have held three meetings so far. Yellen's visit to China has further strengthened the cooperation between China and the U.S., in areas including the balanced growth of the China-US and global economy, financial stability and sustained anti-money laundering. This is of great significance in stabilizing and promoting the economic growth of China and the US and also facilitating the stabilization and recovery of the world economy. On the other hand, we can't simply assume that the visit of Yellen, or the future visit of US Secretary of State Antony Blinken, would fundamentally change the current U.S.-China relations. We see that immediately after Yellen left China, Fitch downgraded its Outlook on China's sovereign credit rating from Stable to Negative. So the fundamental tone of the U.S. toward China and its containment efforts may not have changed at all.

【Anchor】Okay. Mr. Hu, what new features do you expect to see in the future direction of China-US relations?

【Hu】The new features of future China-US relationship: first, Yellen said, "President Biden and I are firmly opposed to the United States and China decoupling". She believed that although there might be differences and conflicts when cooperating, cooperation would still be the main theme. But we've also noticed that the US ambassador to China, R. Nicholas Burns, has recently said that he believes that the US and China relationship is the most important, competitive and dangerous relationship for the US. It will continue to be so for the next decade. He believes China and the U.S. should compete responsibly, maintain peace and keep in touch. He also believes that China and the United States are competing for military dominance and are engaged in an arms race in the most strategically important region, the Indo-Pacific. Moreover, he thinks that although China is the third largest trading partner of the U.S., China wants to overtake the U.S. The U.S.-China competition is a contest over which ideology should lead the world, or in other words, a contest of world values. Economically, China and the U.S. have an intertwined and complicated relationship, but Burns also pointed out that the U.S. does not want to live in a world dominated by China. From this point of view, China-US relations can never go back to the past. Both sides understand their bottom lines, and would be unlikely to make any substantive concessions.

However, "fighting without breaking" - relative peace might also be the theme for quite a long time.

【Anchor】Alright. Ms. Liu, what do you think will be the characteristics of the future development of China-US relations?

【Liu】 I think U.S.-China relations will continue to show the characteristics of both competition and cooperation. From a political point of view, since this is also the year of the U.S. presidential election, this will promote the stability of China-U.S. relations. The economic and trade cooperation between China and the US will also contribute to the economic growth of both countries. From a financial perspective, inflation in the US is resilient and has once again beat expectations. In March, the US CPI and core CPI increased by 3.5% and 3.8%, year-on-year, both exceeding those of the previous month, and the month-on-month growth was also high at 0.4%. It is increasingly evident that it is difficult to control inflation. So the Fed is also releasing messages that it may not start the cutting cycle of interest rates by mid-year. The timing and number of cuts this year might be delayed and reduced. The lowering of tariff barriers and non-tariff barriers between China and the U.S. can actually help ease inflation pressure in the U.S. In addition, the steady growth of China's economy, including the stability and health of the financial system, will also help with the stability of the two countries, including the global economy and financial stability, and vice versa. From a worldwide perspective, geopolitical conflicts, including global climate change and other issues, require both countries to work together and address the challenges. The Sino-American relationship may exhibit temporary stabilization at this stage.

【Anchor】OK, thanks to our two guests. That's all for this episode. Remember to follow us on YouTube or download our APP. I'm Yunfei Zhang. Thanks for watching, and I'll see you next time.